Forecasting cash flow is one of the most crucial skills to develop in making a business a hit in the industry. The main benefit is that it helps you to identify and prepare for any unseen risks and financial commitment. It makes you capable of making strategy decisions with confidence without letting your company go down.
Cash flow forecast is all about looking ahead and knowing how much cash should come in and go in your business, so that you can reinvest and grow eventually. Forecasting a cash flow is the core factor in budgeting you need to run your business every month.
Forecasting a cash flow is typically calculated using business accounting or spreadsheet program. This is because the calculation essentially flows in a cash book format. The biggest challenge in forecasting your cash flow is to accurately analyze the different types of income and expenditure you are expecting in your business. The more assumptions you make, the less accuracy you achieve in your forecast. This is the reason why you need to literally drill down into every detail of your income and expenditure that you are expecting in future.
When you are looking at the expense, the first thing you need to list down, are the automatic payments that go as compulsory expenditures every month. This includes your labor wages, rent, insurance premium, loan amount etc. This is the area that many people get confused and calculate only expenditures that have an immediate effect on the budget. However, one should not forget non-cash items like asset depreciation and savings on interest rates.
If you are starting up a business you would not have a sales history to predict, but that's usually an advantage. If you start on a blank page, you are forcing yourself to think and calculate every income and expenditure, making it a much more accurate calculation.
Accuracy is the most important thing in forecasting your business cash flow. If you do not have accuracy, it's highly impossible to get a realistic figure and make a budget according to it. Subsequently, when you are unsure about your cash flow, it affects your business drastically and by the time you realize it, your business can shut down in no time. How to get help?
While there are professionals who do this calculation for big companies as well as startups, yet one of the most affordable ways is to use the cash flow analysis tool offered by iGoStartup that takes just five minutes of your time, but is highly effective in giving you a good knowledge of accounting principles. The tool is capable of analysing net assets and financial assets of a business and whether a company can get affected with the amount as well as timing of cash flow. While calculating, the tool takes into account the industry the business belongs to, as well as the economic conditions that can affect its cash flow at present and in future.